1 TradeTheMarkets.com Everything You Always Wanted To Know About Systems but Were Afraid To Ask March 20, 2012 Dr. John F. Clayburg

2 Commodity Trading Advisor Disclosure: System trading data presented during the course of this presentation is the result of hypothetical backtesting and does not represent actual trades. System trading data presented during the course of this presentation is the result of hypothetical backtesting and does not represent actual trades. THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR ("CTA"). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION ("CFTC") REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THESE DOCUMENTS ARE READILY ACCESSIBLE AT THE CTA’S WEBSITE. THE CTA IS REQUIRED TO PROVIDE OTHER DISCLOSURE STATEMENTS TO YOU BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU. THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR ("CTA"). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION ("CFTC") REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THESE DOCUMENTS ARE READILY ACCESSIBLE AT THE CTA’S WEBSITE. THE CTA IS REQUIRED TO PROVIDE OTHER DISCLOSURE STATEMENTS TO YOU BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU. "There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

Intellectual Property Notice The material presented in this online webinar is protected by U.S. and international copyright and intellectual property laws. The material presented in this online webinar is protected by U.S. and international copyright and intellectual property laws.

Intellectual Property Notice You are free and encouraged to use this information for your own personal use. You are free and encouraged to use this information for your own personal use. Redistribution of this material to others in any form is prohibited. Redistribution of this material to others in any form is prohibited. © Dr. John F. Clayburg 2012 All rights reserved. All rights reserved.

5 Today's Presentation Trading in the direction of the major trend with “unconventional” interpretation of “conventional” indicators. Actual trading examples. "There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

6 Today's Presentation Before we proceed…. Consider that when trading using technical analysis, we are effectively attempting to mathematically predict human behavior. "There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

7 Today's Presentation Remember that technical analysis is not a world of absolute certainty…. But a world of probabilities and possibilities "There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

8 Today's Presentation “Unconventional” Use of Common Indicators Automated Trading Systems Created from “Unconventional” Use of Common Indicators "There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

9 Automated System Results Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

10 The Four-Step Trading Method Determine the major trend for the day Define the minor trend within the major trend Identify a high-probability entry point Define logical stop-loss and profit- taking strategy There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results". There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

11 Trend Definition Trend definition can be long term, medium term or short term. Depends on the trading style and objective of each individual or trading program.

12 Trend Definition Downtrend Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. Uptrend 100 Period Simple Moving Average

13 Trade Selection Identify minor trend exhaustion When the trend has been defined, the entry point can be defined by the “unconventional” use of a number of indicators Moving Average MACDCCIRSI

14 Simple Moving Average 2 Moving Average Lines 18 period 9 period Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

15 Simple Moving Average 2 Moving Average Lines 18 period 9 period Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. X X X X X X X XX

16 Simple Moving Average Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

17 Simple Moving Average Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

18 MACD Moving Average Convergence / Divergence The Moving Average Convergence Divergence indicator calculates 2 exponential moving averages. The Moving Average Convergence Divergence indicator calculates 2 exponential moving averages. The difference between these 2 averages is then plotted as the MACD.

19 MACD MACDMACD Average Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

20 MACD MACDMACD Average Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

21 MACD Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

22 MACD Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. Trade Only In Direction Of Major Trend

23 MACD Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

24 MACD Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. Using MACD – Short Term Trend Definition

25 MACD Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. Using MACD – Short Term Trend Definition MACD > 0 = UpTrend MACD < 0 = Down Trend

26 Commodity Channel Index Calculations are similar to moving averages Compares an average price to an average price x bars ago

27 Commodity Channel Index Buy – Sell on Crossovers Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

28 Commodity Channel Index Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

29 RSI An “unconventional” use of the Relative Strength Indicator (RSI)

Signal Generation Relative Strength Index (RSI) Classic overbought – oversold oscillator “Classic” interpretation suggests buying oversold conditions under 20 – 30 and selling overbought conditions above

RSI 31

RSI 32

RSI 33

RSI 34

35 Trend Definition 200 Day Moving Average Line Defines Uptrend Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. 5 Period RSI RSI < 25 = Buy SignalRSI > 55 = Sell Signal

36 Trend Definition 200 Day Moving Average Line Defines Uptrend Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. 5 Period RSI RSI < 25 = Buy SignalRSI > 55 = Sell Signal HyperCycle Strategy

37 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. HyperCycle Strategy

38 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

39 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

40 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

41 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. Four Step Method 1. Define Trend 2. Define Exhausted Counter Trend 3. Define Entry Point 4. Define Exit Point

42 Recap Four-Step Method Determine the major trend for the day Define the minor trend within the major trend Identify a high-probability entry point Define logical stop-loss and profit- taking strategy

43 Trade Selection An “unconventional” use of the momentum indicator

44 Trend Definition Momentum Simply stated, momentum is simply the difference between the present price and the price “x” bars ago

45 Trend Definition Momentum For our purposes, if momentum is greater than zero, the trend is higher. If momentum is less than zero, the trend is lower.

46 Trend Definition Zero Line Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

47 Trend Definition Zero Line Momentum > 0 = Uptrend Momentum < 0 = Downtrend Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

48 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

49 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

50 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

51 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

52 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

53 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

54 Trend Definition Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

55 Trade Selection Another “unconventional” use of the RSI indicator

Signal Generation Relative Strength Index (RSI) Classic overbought – oversold oscillator “Classic” interpretation suggests buying oversold conditions under 20 – 30 and selling overbought conditions above

RSI 57

RSI 58

Signal Generation Relative Strength Index (RSI) Unconventional approach using RSI to pinpoint the entry after the trend is defined by momentum

Signal Generation Relative Strength Index (RSI) 1. Following the trend definition by momentum: 2. Buy RSI cross over Sell RSI cross below 40

Signal Generation Momentum plus RSI Buy signal: 1. Momentum greater than zero 2. RSI must cross below 60

62 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

63 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

64 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

65 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

66 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

67 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

68 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

69 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

70 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

71 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

72 Automated System Results Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Signal Generation Momentum plus RSI Sell signal: 1. Momentum less than zero 2. RSI must cross above 40

74 Momentum / RSI Sell Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

75 Momentum / RSI Sell Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

76 Momentum / RSI Sell Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

77 Momentum / RSI Sell Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

78 Momentum / RSI Sell Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

79 Momentum / RSI Sell Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

80 Momentum / RSI Buy Signal Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Separate Parameters for Buy and Sell Side Efficiency and profitability of the strategy benefits significantly with separate settings for the long side and the short side. 81

Separate Parameters for Buy and Sell Side The long side and the short side are two totally different markets. 82

Separate Parameters for Buy and Sell Side 83 You must feed a bull every day…

Separate Parameters for Buy and Sell Side 84 … but a bear can go all winter

Separate Parameters for Buy and Sell Side 85

Separate Parameters for Buy and Sell Side 86

87 Automated System Results Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

88 Automated System Results Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

89 Automated System Results Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

90 Automated System Results Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

91 Automated System Results Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

92 Automated System Results Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

93 Four-Step Method Basic setup theory for all systems. 1. Define the trend – momentum 2. Define the exhausted countertrend 3. Define an entry point – RSI 4. Exits Seven distinct exit routines

94 System Trading EXITS!!!!!!!! Entries are the easiest part of a trade. Ultimate success depends largely on structure and efficiency of exit routines

95 System Trading EXITS EXITS 1. Specific targets 2. Specific stop loss per contract 3. Equity out 4. Trailing stop on runners 5. Move stop after target one 6. Breakeven after target one 7. Day loss

Universal System Inputs Number of contracts or lots in initial position

Universal System Inputs Target 1 value in points Number of contracts that will be liquidated at the target 1 price Remaining contract is open until reversed, stopped out or end of day exit

Universal System Inputs Long 2 Contracts Exit 1 at Target 1 Reverse to Short 2

Universal System Inputs Target 2 and Target 3 are set up in similar fashion

Universal System Inputs Target 2 value in points Target 3 value in points

Universal System Inputs Target 2 value in points Target 3 value in points Targets are inactive

Universal System Inputs Targets are inactive until a positive number is entered here

Universal System Inputs Initial Position = 4 Contracts Take 1 st off at 30 point target Take 2 nd off at 45 point target Take 3 rd off at 60 point target 4 th contract is open until it is reversed, stopped out or end of day exit

Universal System Inputs Long 4 Contracts 3 Target Exits Reverse to 4 Short

Universal System Inputs 4 contract system report

Universal System Inputs Multiple contract example

Universal System Inputs Numbers represent remaining open contracts

30 contract system report

30 contract equity curve

Universal System Inputs 1 = on; 0 = off Trail amount in points

Position 2 Trailing Stop New Trailing Stop on 2 nd position

112 Position 2 Trailing Stop Trailing Stop activates only after target 1 hit

113 Position 2 Trailing Stop Trail Amount is in Points Measured from the highest high of the position after target 1 is hit.

Universal System Inputs Trail amount in points

115 Position 2 Trailing Stop 20 Points

Position 2 Trailing Stop Previous Configuration

Position 2 Trailing Stop New Trailing Stop on 2 nd Position

Tighten Stop after Target 1 Stop loss in $ per contract for initial position Stop per contract for all remaining contracts after target 1 hit 1 = on; 0 = off

Don’t use stops & targets Don’t use stops & targets

Tighten Stop after Target point target 50 point stop 150 point initial stop

Tighten Stop after Target 1 Target 1 stop only used as a stop after target 1 is hit and only works as a stop loss. This input will not accept a negative number

Tighten Stop after Target 1 If you wish to use a stop to specify a profit point for all positions after target 1 is hit use the breakeven stop and enter a point value in the be_plus input.

Tighten Stop after Target 1 No negative numbers here This configuration sets the exit for all remaining contracts to entry plus 20 points

Tighten Stop after Target 1 20 point profit set after target 1 is hit

Tighten Stop after Target 1 Position 2 trailer and target 1 stop loss can be used concurrently. The system will exit the position when the ‘closest’ stop is hit.

Tighten Stop after Target 1 For example if the position 2 trailer is set to a high number the resulting exit may be a greater loss than the stop specified by the target 1 stop. In this case the higher target 1 stop will exit the position.

Universal System Inputs Buy Side RSI Length Sell Side Momentum Length Sell Side RSI Length Buy Side Momentum Length

Universal System Inputs Higher values for these inputs will result in fewer trades over identical time periods

Universal System Inputs 1 = on; 0 = off $ Amount necessary to Trigger trailing stop $ Trailing stop on daily equity curve

Universal System Inputs Equity Floor = $850 Equity Trail = $100 Daily equity > $850 Trailing stop exit

Universal System Inputs If “Equity Out” All trading disabled for remainder of session

Universal System Inputs 1 = on; 0 = off When toggle_be_tgt = 1 then stop is automatically moved to breakeven when target 1 is hit

Universal System Inputs Number of points to “fade” the breakeven stop

Universal System Inputs For next chart stop moves to breakeven after target 1 is hit

Universal System Inputs

Breakeven stop after target 1

Universal System Inputs Stop goes to 10 points better than breakeven

Universal System Inputs “Stop Loss” to breakeven plus 10 points

Universal System Inputs Stop to breakeven + 10 points

Universal System Inputs Breakeven Disabled

Universal System Inputs Breakeven disabled

Summary Breakeven Disabled Enabled Enabled + 10 points Net% Profitable $4,65562% $5, % * $5,920 71% * * TradeStation does not consider a “breakeven” trade as “profitable” for percentage profit calculations

Universal System Inputs 1 = on; 0 = off Loss per day in $$

All trading disabled for remainder of session If “Day Stop” is hit

Universal System Inputs Limits Number of Trades Per Day Default = 1000 Effectively Disables This Feature

Unlimited Trades Per Day

5 Entries Only “Toggle Day Limit” Label

Still Just 5 Entries Today

155 Automated System Trading Here’s what a system trade actually looks like on a chart…

156 Universal System Short 2 Contracts Exit 1 at Target 1 Reverse to Long 2 Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. Exit 1 at Target 1 Exit 1 on Close

157 Universal System Long 40 Contracts 3 Target Exits Reverse to 40 Short Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success. Reverse to 40 Long 2 Target Exits Close Time

Separate Parameters for Buy and Sell Side Efficiency and profitability of the strategy benefits significantly with separate settings for the long side and the short side. 158

Separate Parameters for Buy and Sell Side Effective strategy parameters for momentum and RSI can vary significantly from day to day. 159

Separate Parameters for Buy and Sell Side The challenge is to select the proper variables early in the day. 160

Separate Parameters for Buy and Sell Side Enter: Parallel Function Technology. 161

Trending / Non-trending Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Trending / Non-trending Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Trending / Non-trending Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Trending / Non-trending Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Trending / Non-trending Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Trending / Non-trending Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Trending / Non-trending Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

Parallel Function Technology Parallel functions are a complicated process to design and trade. More Info: 169

Parallel Function Technology Parallel functions are a complicated process to design and trade. More Info: 170

Separate Parameters for Buy and Sell Side This week’s trades: 171

Separate Parameters for Buy and Sell Side 172 February $757

Separate Parameters for Buy and Sell Side February $935

Contact Information Dr. John Clayburg